5th May 2014
Is High Noon fast approaching for the Bank of England over the housing market? Certainly most of the ingredients of the plot are available. All the latest house price surveys make for bracing reading with Nationwide suggesting rises above 10% in the last year.
The Bank of England governor Mark Carney warned of housing market risk several times during his tenure as Governor of the Bank of Canada, so he is obviously alive to the issue in the UK.
We have an institution in the Bank of England, equipped with more extensive powers to see off threats to financial stability than it had in the past. Certainly you don’t set up organisations/committees within the Bank with names such as the Prudential Regulatory Authority and the Financial Policy Committee without the expectation that these institutions will try and head off the next crisis.
So while much of the debate about the Bank of England has focused on interest rates, it has many other policies at its disposal. The ability of the Bank and its sister regulators to calm down the housing market by calming the supply of mortgages has surely been underestimated.
The Guardian recently reported a speech from Sir Jon Cunliffe which should make all housing market watchers take notice. Sir Jon is deputy governor with responsibility for financial stability who sits on the PRA, the FPC and the Monetary Policy Committee for good measure. His speech is available here on the Bank’s website.
In the speech, Cunliffe discusses the possibility that the market will slow down – a soft landing, but appears to believe it much more likely that it will suffer something akin to a crash given recent history.
Now of course, the mortgage market and its relation to the housing market is a very complicated business but regulators are already putting constraints on the market, which Sir Jon also notes. Another regulator, in this alphabet soup of regulators, the Financial Conduct Authority has just introduced the Mortgage Market Review. This could constrain mortgage supply because it has ramped up the affordability requirements for lenders and borrowers. For example, obtaining a fast track mortgage is just about impossible, under the new rules.
It is also highly significant that as part of the stress tests which banks and building societies must conduct, under yet another regulatory body the Prudential Regulatory Authority, the banks must factor in a big fall in house prices.
Once again, it is the Guardian, the most housing-market bearish of the national papers, which reported last week that eight big banks and building societies, the institutions most people have mortgages with, must factor in a staggering 35% fall in house prices, and interest rate rises of 5% into their stress tests.
But once again, Sir Jon notes this requirement in his speech.
What if the one or more institutions fail this test? The implication must be that they must think about holding more capital and that would surely constrain the supply of mortgages, though of course business lending might suffer collateral damage too.
These are not unrelated decisions. If interest rates hit five per cent it will be because the MPC raised them to this level.
But if the Bank forms the view that house prices are getting close to bubble conditions – whether that is due to housing supply, pent up demand from the recession, overzealous estate agents, spill over from Central London buy-to-let or whatever, the Bank of England is unlikely to simply stand by and watch.
This might not please everyone in Government as an election draws near. But while it is the oldest central bank in the world, at least part of its recent identity was forged in the financial crisis. If it’s not High Noon, it’s not far off eleven o’clock.